Canadian dairy processors quietly awarded benefits from new CPTPP imports

While the dairy industry was warning about concessions forced upon Canada in the new North American free trade deal text last week, the federal government quietly awarded Canadian dairy processors almost exclusive rights to import nearly all of the dairy products set to arrive soon from countries like New Zealand under the new Comprehensive and Progressive Trans-Pacific Partnership.

That means that in a few weeks, when Canadian consumers have the option to purchase more foreign dairy products, Canada's dairy industry could still get a cut of the profits — at least temporarily — as it imports and then markets foreign dairy alongside products made with Canadian milk.

"This is a support for the dairy farmers through a roundabout means," said Karl Littler, senior vice-president of public affairs for the Retail Council of Canada.

"(The government) will, of course, deny that until they're blue in the face."

The revised North American trade agreement — dubbed the Canada-United States-Mexico Agreement (CUSMA) by Ottawa and signed by the leaders of all three countries last week — is the third major trade agreement in a row to hand over a share of Canada's dairy market to foreign milk products.

Canadian dairy farmers estimate that about ten per cent of their market has now been conceded at the negotiating table.

Cheese from the European Union began entering Canada last fall, under the terms of the Comprehensive Economic and Trade Agreement (CETA).

After the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) takes effect on Dec. 30, specified quantities of cheese and other dairy products from 16 different categories will begin to enter Canada tariff-free from the 11 CPTPP member countries, including globally-competitive products like New Zealand's butter.

The federal government has struck working groups to come up with a strategy for the future of Canada's dairy industry — which now appears set to shrink — and to plan for appropriate compensation for affected farmers.

A government official speaking to CBC News as Finance Minister Bill Morneau released his Fall Economic Statement last month pointed to dollar amounts earmarked for "non-announced measures" and said a not-yet-finalized sum of money will be available for compensation.

About-face on import strategy

In a move Littler described as "very low key," Global Affairs Canada quietly opened the application process for licences to import dairy products from CPTPP countries last week. The application timeline is very short — the deadline is Dec. 12. Successful applicants will receive their allocations by Dec. 21, with imports set to begin at the end of the year.

When import licences were awarded for EU cheese last year, half of the allocation went to retailers and distributors and half to dairy processors — with the exception of industrial cheese imports, all of which were awarded to other food processors, such as those who make frozen food entrees. This cheese import quota was split roughly equally between smaller and larger businesses.

Things are different this time. Dairy processors are eligible for between 80 and 90 per cent of the CPTPP import licences, with a much smaller share available for dairy distributors. Retailers have been shut out entirely.

"We got nothing," Littler said. And the amount allowed for distributors — which could include some large, vertically-integrated players in the Canadian grocery scene — is a "token amount," he said.

A spokesperson for International Trade Minister Jim Carr, Joseph Pickerill, wrote CBC News that "extensive consultation with industry preceded the approach ultimately taken," with each quota tailored to specific sectors.

The government will now monitor how well the CPTPP import process works before deciding how to proceed with the additional quota Canada conceded in the new NAFTA deal.

Barely keeping commitments?

Littler said that if the federal government had "gone much further" in giving quota to processors, "they'd be in violation of the treaties." The government isn't allowed to award import quota to farmers outright and it's not allowed to give the entire amount to processors either, he noted.

"When you can't give 100 per cent of the butter quota to processors, but you give 90 per cent to processors, I guess you have to ask whether that is in keeping with the spirit of the treaty," Littler said.

The most aggressive dairy exporter among the 11 CPTPP countries is New Zealand, where Fonterra, the country's near-monopoly dairy co-operative, is a dominant global player. CBC News reached out to the New Zealand High Commission for comment, but did not hear back before deadline.

EU officials supported giving retailers most, if not all, of the import quota for cheese under CETA because they did not trust the Canadian dairy industry to ensure their products were sold as negotiated.

With only a few weeks remaining in 2018, Canada has imported about 73 per cent of the 5.3 million kilograms of EU cheese it committed to buy this year.

With holiday consumption expected to be strong, it appears likely imports could rise over a key 75 per cent threshold by the end of the year. But if Canada does not import at least three-quarters of this commitment, on average, over the first three years CETA is in effect, the deal says the two sides will reconvene and perhaps renegotiate.

The situation is more dire for industrial cheese imports, a food ingredient negotiated separately with the EU.

Canada has filled about seven per cent of what Canadian food processors were allocated. In a last-minute move, the federal government quietly re-opened import licence applications to interested dairy processors this fall. But no flood of imports has materialized to get Canada anywhere close to fulfilling its 2018 commitment.

'Unhappy' people

If processors reconsidered and didn't want all the import quota they applied for, they had until Aug.1 to notify the government and return it for re-allocation to retailers and distributors.

Mathieu Frigon, president and chief executive officer of the Dairy Processors Association of Canada, told CBC News he doesn't know how much quota was returned.

Why would companies apply for quota if they didn't intend to use it?

"That's a very good question," Frigon said. "It's one thing if you don't apply ... then Global Affairs would know we don't have any demand for it. But if you apply and don't use it, that's a problem."

A lot of people were "unhappy" with the way the CETA import allocation went, Frigon said. "Really unhappy."

It will be very difficult for Canada to avoid a tough conversation with the EU about its industrial cheese commitment, based on how things are going so far.

The government knows which kind of importers — retailers/distributors or processors — have been slow to keep their commitments. But it won't release this data, even though both the industry groups involved and CBC News have asked for it.

Nevertheless, Frigon said it's essential for domestic processors to be awarded quota.

"We are the ones that are suffering under trade agreements," he said. Profits from imports mitigate market losses from trade deals for some processors.

It also "maximizes options to consumers" he said, because processors have a vested interest in choosing imports that add variety to Canadian cheese counters, rather than compete with domestic cheeses.

Retailers, on the other hand, may be tempted to displace Canadian cheeses with cheaper foreign products to maximize their profits.

Data available so far suggests the most popular cheeses imported under CETA are parmesan, cheddar and gouda.

While last week's announcement that processors will get most of the CPTPP import quota is "welcome news," Frigon said, it doesn't necessarily make up for what they could lose under the new NAFTA.

Processors joined dairy farmers last Friday in condemning additional "oversight" and price disclosure requirements they said were inserted into the text of the new North American trade pact by the Americans after talks were supposed to have concluded.

In the end, this new CPTPP allocation is only temporary. The government's "interim" announcement applies only to imports for 2019.

It's reviewing the import quota allocation system next year, prior to handing out the import quota for NAFTA. That process won't be complete until after the next federal election.